Populism, nationalisations, corruption scandals, Bolivarian revolts and a healthy dose of sheer incompetence – Latin-American cliches seem to have been proven right over the past couple of years, creating an image of the region as a risky place to invest, both financially and more traditionally. Spanish companies have been hit hard by several high-profile nationalisations in Argentina and Bolivia last year, but does the cliche still ring true for the rest of the region?
This year’s Ibero-American Summit simulation in MUNUSAL discussed one of the most important subjects for a prosperous Latin America: The problem of “the expropriation and security of companies in Latin America and its consequences for political stability and economic development.” Don’t let that boring, lengthy description fool you, because Newswire took a close look at Latin American economic policy. So, what do we think?
Argentina to Spain: “YPF is ours, thank you very much.”
It has been almost a year since Argentina’s President Cristina Fernandez de Kirchner signed a bill nationalising the Spanish-owned subsidiary YPF, with thousands of jubilant militants cheering on the Plaza de Mayo, Buenos Aires. The move, in which the Argentine state claimed 51% of the shares, stunned oil and investment experts as well as YPF’s Spanish mother-company Repsol. Spain’s Prime Minister Mariano Rajoy warned Argentina that her audacious move would have severe consequences for the diplomatic and economic relations between both countries and a couple of days later, Spain had restricted biofuel imports coming from Argentina worth $991 million. Crying wolf, the Argentinian Government rebutted by stating that YPF had not lived up to the promises it had made to the Argentine state: it had not invested in research, oil-production was subpar and YPF’s overall failure to meet Argentina’s energy requirements was deemed unacceptable. Critics say that it was a largely political move aimed at acquiring government control of the hydrocarbon resources, riding on a wave of popular sentiment. Whatever the Argentinian government’s true motives, the nationalisation was a move which further scared away foreign direct investment in the South American state. Seeing as it’s already on the blacklist of most foreign companies, this wasn’t a smart move, Mrs. Kirchner.
Furthermore, it was extremely badly timed, as Argentina is not without other troubles. This year, the country is yet again heading towards a technical default, following a New York Court decision on the 29th of March which ruled that Argentina still has to pay back several billion dollars in matured sovereign debt bonds to a group of investment funds (law nerds can google the pari passu saga). Failure to pay will result in a second default since the spectacular financial implosion of 2001. The New York decision has not been well received, President Kirchner has been derisively calling the investment funds “vulture funds” ever since they had boldly impounded an Argentine military vessel in Ghana as collateral for their claims. Impounding a military vessel though, is bound to have made someone’s little boy’s dreams have come true.
Bolivia: Evo Morales Strikes Again! (And Again, And Again…)
Two weeks after the YPF nationalisation on May Day last year, Bolivia’s left-wing President Evo Morales nationalised Spain’s Red Electrica Corporacion. Two electricity distribution companies owned by Spanish Iberdrola and three airports managed by Spanish airport-operator SABSA followed shortly thereafter. Morales said the company had failed to fulfill investment commitments promised almost twenty years ago and that SABSA had made “an exorbitant profit with a derisory capital input”. Evo Morales, a former llama herder and coca farmer, has turned nationalisations into a May-Day tradition since winning the Presidential elections in 2006. Since his victory, he has been busy renationalising the oil industry, telecoms, much of the electricity generation and zinc and tin mining industries. There is not much left to nationalise anymore in Bolivia.
While his motives for reducing the costs of water and electricity for the poor are praiseworthy, noble ideas, as is too often the case, have been hijacked by poor governance: Over 50% of the Bolivian people are now claiming reduced tariff rates, stifling the financial resources needed to invest in new and better infrastructure. Likewise, the productivity and overall quality of the service has gone down considerably as a result of an increase in red tape.
Rest of Latin-America: “We’ve Moved On, You Should Too.”
Compared to inward-looking, protectionist Argentina, Bolivia and the crumbling petrosocialistic ideals of Venezuela, the difference is stark. Mexico, Chile, Panama, Colombia, Peru and Brazil have moved on from the tendency to resort to brazen economic populism, leading the continent forward. The centrist governments of these nations are seeking to encourage foreign investment and private entreprise, prudentially investing their hard-earned cash. The push for private initiative is looking like a solid move: The upbeat, can-do attitude is encouraging people to start a business, democracy is effervescent, inflation is low and the economy is still growing, riding the commodities boom wave which sparked growth a small decade ago.
It is this same commodities boom which is allowing Argentina, Bolivia and Venezuela to hide the full impact of their nationalisations for the moment. Thanks to China’s rise and its hunger for raw materials, money has been seemingly falling from the heavens, funding an artificial bubble of generous subsidies as well as the squandering of it on economic and social policies which are not sustainable. In this context, the nationalisations have more to do with regime maintenance and power politics rather than creating a viable, durable national economic and social policy. Indeed, all three countries are nearing elections, hoping to secure their power for another term. Venezuela’s election campaign has served as an excellent indicator of the rising tensions between those that still feverishly support the “nationalisation solution”, against those who wholly oppose the overbearing involvement of the government in private business. Sunday’s Venezuelan election results will reflect this deep divide.
With a global economic outlook which is more uncertain than ever, there may well be a political reckoning when the commodities bubble bursts or deflates. Rather than symbolising a new wave of economic populism in Latin America, Argentina’s, Bolivia’s and Venezuela’s nationalisation fever may well prove to be a last stand.